Healthcare: Startups Big But Hidden Problem?

Yesterday, I posted a question on Twitter to entrepreneur and investor Manu Kumar, who recently launched his own venture firm, K9 Ventures.

The question was: How do startups provide health care coverage for their employees? Manu said venture capital firms do not provide group coverage because it is messy and risky. “Small startups end up with catastrophic coverage only,” wrote Manu. “It is a HUGE recruiting issue. One of the biggest reasons folks stay in big companies and don’t do startups is healthcare costs.”

I would love to hear from more entrepreneurs and investors about this problem–and potential solutions. You would think this is one area where the government could help small business?

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2 Responses to “Healthcare: Startups Big But Hidden Problem?”

Across the board, our portfolio companies offer healthcare insurance to their employees. There are variances in planes as you would expect but I think you will find most venture-backed companies consider this a requirement as oppossed to an option. That said, the costs are a source of continual frustration when it comes to budgets. Not clear that the current debate in Washington will yield an credible or acceptable alterntive. This issues are primarily cost and federalization of insurance is not likely to control these costs – particularly when you layer government overhead onto an program. Perhaps some combination of Tort Reform, cross-border insurance competition, most favored pricing on drugs (vis a vis other countries which we subsidize) can have an impact.

140 characters over Twitter is a tough medium to convey an appropriate point of view on such a complicated topic. So I figured I would provide a bit more color around my view over here.

I’ll start by saying that the word “startup” is very loaded. There are really a range of companies we are talking about here. Starting from the one-person individual who wants to venture out on their own as a consultant, to the two person team in a garage or living room, to a 5-10 person company with some angel money, or a 10-20 person company with some venture money, (Series A presumably), and of course the 50+ person company with more financial backing (Series B or C or with revenue). Since K9 focuses on seed-stage and concept-stage funding, I spend most of my time working with companies in the 2-10 person range.

In cases when it is just the founders of a company (1-2 people) and they’re boot strapping the company, founders have sometimes either gotten just catastrophic coverage (it’s the cheapest option when bootstrapping) or even relied on the coverage from their spouse/domestic partner. Once you have a startup which has 2 or more employees, it is possible to get group health insurance. However, the cost at this level is very high and so most of the companies I know of usually opt for having some of the early employees use individual plans and then reimburse them for the cost of those plans. This usually works out okay for tech startups, since most employees are young and relatively healthy. As the company grows, they can opt for group coverage.

Some of the big companies (think Microsoft, Google, Oracle etc.) offer excellent group plans to their employees as benefits. This is really one of the tools they use to recruit and retain people. A lot of people will go to work for a big company or stay at a big company just because of the healthcare plan and the lack of healthcare portability. In order to recruit talented people into a startup, startups also need to offer competitive health plans and most of the well-funded startups do. It’s just a cost of attracting and retaining talent.

Your question to me was whether VCs offer their startups health coverage. To date, I don’t think I have come across any instance in which that has been the case. My speculation is that this is because most VCs stick to what they know best — evaluating companies, funding them and helping them with the business. VCs don’t get in the HR/Benefits administration business — there are other specialized companies that already do this. In fact, the HR/benefits administration companies like to work with venture backed companies since then they get in early (switching costs increase as the company grows).

So to a large extent tech startups figure out a way to provide health insurance to their employees.

My original tweet about healthcare (see http://twitter.com/manukumar/status/3153234450) was motivated by a couple of conversations. On one hand I was talking with folks who work in big companies about health insurance. They really didn’t have any idea how expensive it is to do individual healthcare (higher deductibles, copays and co-insurance). I’ve also chatted with folks who have been on individual/family plans who have been denied coverage due to pre-existing conditions (most individual plans are medically under-written, unlike group plans which are not). So my tweet was really a realization/recognition that for most people who work in a big company and have group health insurance coverage really don’t have an appreciation for what it is like for others — who need to get individual coverage. This includes people who are trying to work on their own as consultants (more and more people who fall into this bracket under the current economy) and also entrepreneurs when they are first starting out. On the other hand, I’ve also had conversations with some great people who feel they cannot leave their big company job only because they do realize that finding comparable healthcare coverage would be difficult/impossible.

A true entrepreneur is one whose job it is to overcome obstacles. And so the good entrepreneurs make it all work despite the deficiencies of the system. That is a very small hurdle in the big scheme of things. However, the point as I mentioned in a follow-on tweet (see http://twitter.com/manukumar/status/3155987175) is that having health-insurance tied to an employer is simply stupid. It limits job portability — keeps people in places they may not want to be just because they cannot afford to have a break in their health insurance coverage. The way the current system works (and I’m exaggerating for effect, but maybe not) is that “You only deserve health insurance if you have a job.” Doesn’t that sound absolutely ridiculous? So that every time you change jobs there is a break in your health insurance, or a change in carriers if the next company you go to only offers a different plan. And if you lose your job or more likely (for the folks I deal with) decide to venture out on your own to do consulting or a startup, you may not be able to get coverage at all! There is of often talk about COBRA — well, COBRA is probably aptly named because it the high cost of COBRA coverage stings just like a real snake bite.

The bigger point (and the point behind my original tweet) is that health care reform is going to be very difficult to bring about because everyone cannot even see all the problems that exist in the system. In this case, my friends and buddies who work for big companies had no idea how much more expensive/difficult individual coverage is. It is truly a case of the elephant and the blind men (http://en.wikipedia.org/wiki/Blind_men_and_an_elephant).